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Interview: Indian Oil Corp eyes Saudi, US crude to replace bulk of Iranian volumes

Kuala Lumpur — State-run Indian Oil Corp., or IOC, will be aiming to replace up to 70% of the Iranian crude volumes with incremental inflows from Saudi Arabia and the United States, as the country's biggest buyer of Iranian crude steps up effort to find alternative supplies, its chairman Sanjiv Singh told S&P Global Platts in an interview.

IOC, India's largest refiner, is keeping its options open to sign more long-term deals for the US crude. The company is also talking to most of the other term crude suppliers in the Middle East to make up for the remaining Iranian volumes, Singh added.

"Iranian volumes for IOC at the moment is zero. Saudi Arabia has sufficient spare capacity. They will be able to meet our requirements. We are also expecting that more US crude will be coming to the market in the second half of this year," Singh said.

IOC has secured term deals to import 4.6 million mt of US crude to help it replace just over half of its Iranian imports. Out of this production, 3 million mt will be supplied by Norway's Equinor, while the remaining 1.6 million mt will be sourced from Algeria's Sonatrach.

"Between Saudi Arabia and the United States, we will aim to cover about 70% of the Iran replacement crude," Singh said. "For the remaining amount we have flexibility in most of our term contracts to raise the volumes."

India's voracious appetite for US crude is already visible in the latest numbers from the US Energy Information Administration. The country imported 263,000 b/d of US crude in Q1 2019, an eightfold jump from as low as 33,000 b/d in Q1 2018. Inflows so far this year have also been more than double the 2018 average of 131,000 b/d.

While IOC could also be looking for incremental supplies from Kuwait, the UAE and Mexico to replace Iranian imports, it will also be actively seeking volumes in the spot market depending on commercial viability.

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LARGE VOLUME TO REPLACE

Iranian crude exports to India had been robust before the current sanctions were implemented in November 2018. But imports fell to around 190,000 b/d in Q1 2019, down sharply from 440,000 b/d in Q1 2018, according to S&P Global Platts Analytics.

"When a big supplier like Iran goes out of the market, there is an impact on prices. We are not concerned about supply but we are concerned about prices," Singh said, adding the India imports more than 80% of its crude oil requirements.

Singh added that rising Middle East tensions were a cause of concern as huge volumes of Indian crude supplies come through the Strait of Hormuz.

"If supplies through that channel are disrupted it will be a very difficult scenario. You can't prepare yourself for a long blockade of such channels," Singh said. "Our reserves can only take care of very short disruptions."

A series of recent attacks on oil tankers in the Gulf of Oman, including one on a UAE-flagged ship, has put the oil market on alert and triggered concerns over possible supply disruptions.

Iran has denied involvement in the incidents. But it has repeatedly threatened to close the narrow Strait of Hormuz, if its oil exports are squeezed by the US sanctions, which are supported by Saudi Arabia and the UAE. About 21 million b/d -- more than one-fifth of global oil supply -- transits through Strait of Hormuz.

US President Donald Trump on Monday signaled the US may lessen its role in policing the strait, calling on major importers of Middle East oil, including China and Japan, to pay their share to ensure freedom of navigation through the passage.

"As far as India's oil security is concerned, I would not say we are very comfortable but we are well-balanced. There is hardly any geography or oil supplier from whom we don't buy," Singh said. "So there are alternatives."

THE IMO COUNTDOWN

IOC will start producing 0.5% sulfur fuel oil from October 2019, three months before the start of the International Maritime Organization's global sulfur limit rule, Singh said.

The IMO will cap global sulfur content in marine fuels at 0.5% starting January 1, 2020, from 3.5% currently, outside the designated emission control areas where the limit is already 0.1%.

"We are aiming to get the first IMO-compliant cargo out in October," Singh said.

IOC aims to supply more than 1 million mt/year of the cleaner fuel from its Haldia refinery on the eastern coast and from the Gujarat refinery on the western coast. Singh said IOC should be able to cater to both domestic and overseas ships across India's coastline.

"We will be ready to supply the volumes much before the end of the year. The Gujarat refinery will produce the bulk of the volumes of the IMO-compliant fuel, while the Haldia refinery will produce relatively lesser volumes," Singh said. "But it's a great opportunity that we are seeing for coastal refineries."

On the demand side, India is facing headwinds, such as a slowing economy, weak vehicle sales and higher fuel prices.

Oil products demand in May remained flat year on year at 18.61 million mt, or an average 4.71 million b/d, the latest provisional data from the Petroleum Planning and Analysis Cell showed.

Singh said that oil demand in recent months had shown signs of weakness. But over the longer-term demand prospects should remain bright.

Platts Analytics has recently projected India's oil product demand growth to be around 200,000 b/d in 2019, adjusted down by 40,000 b/d since early this year, based on recent soft data.

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Eric Yep, newsdesk@spglobal.com

-- Edited by Debiprasad Nayak, debiprasad.nayak@spglobal.com